
Temper Your Emotions
InvestingThe 2017 DALBAR study of investor behavior has been released and it compares the returns of the average investor with the average returns of the investment markets. And guess what – the average investor isn’t doing so well. The average investor has averaged a 3.6% return over the last 10 years in their stock funds as compared to the S&P 500 Index which averaged 6.95% over the same period. The average investor’s total portfolio including non-stock funds (primarily bonds and cash) earned only 1.79% over the 10 years.
There are several reasons why average investors are underperforming. Average investors have proven to be very good at buying high and selling low. Their attempts at timing the market (moving funds from stocks to non-stocks and back) are negatively impacting their performance. It is impossible to consistently time the market and your emotions (fear and greed) trick you into making bad decisions which are costing you precious dollars necessary for the maintenance of your lifestyle. The only rational course of action is to buy stocks when you have the money and sell stocks when you need the money. The rest of the time leave them alone.
The second reason for the average investor’s poor performance is improper asset allocation. The average investor does not have enough stocks in their portfolio. Many investors hold back on stock exposure due to down market fears. Studies have shown that having an emergency cash reserve and no consumer debt (except a home mortgage) can help to sooth emotions when stock markets are down and help to maintain higher stock market exposures and higher total returns over time. It only makes sense that you won’t feel as afraid of the future when markets are down if you have a healthy slug of cash in the bank and no debt payments that must be met. The right amount of cash in the bank appears to improve our feelings of well-being and life satisfaction.
The third reason for the average investor’s underperformance is that they don’t have a plan – or a professional advisor to help them make the important decisions necessary to create the plan. A caring, experienced, Fee-Only, full-time fiduciary Certified Financial Planner professional can help to create your plan for the future and assist in keeping you on course – especially when the going gets tough. We have helped hundreds of families experience their dream lifestyle. Let us know if we can help to reach yours.